John Wanamaker, a department store mogul in the late 19th and early 20th centuries who is considered by many as the creator of modern advertising, once said, “I know half the money I spend on advertising is wasted, but I can never find out which half.”
Times are tough and as a business owner, you should make sure you spend your limited resources wisely. You need to know if what you spend on marketing, including social media, is adding value to the bottom line.
I had a chance recently to sit down with Olivier Blanchard, who, as the noted author of Social Media ROI, knows a lot about measuring return on investment.

Question: What are the three most common myths about return on investment?
Answer: “The first one I encounter on a regular basis is ‘You shouldn’t worry about ROI in social media. Conversations and engagement are far more important than money and what the space is really about.’
The problem with that is measuring engagement and conversations shouldn’t preclude an organization from also measuring the impact that has on the bottom line … The engagement is being funded to drive something else, not just to justify itself. This could be a variety of things from increasing sales to improving brand perception …
The second myth is ‘Social media has its own ROI that is completely different.’ The truth is that ROI is media-agnostic … Return on investment is always calculated exactly in the same way no matter what the medium, industry or activity: Money invested versus money gained.
And the last one is ‘The actual ROI of social media is too complex to calculate, so why bother?’ While it is true that you cannot always determine the precise ROI of social media … you can, through sampling, get an idea for the percentage of sales that specific channels are responsible for.”
Q: What is your advice to small business owners starting their marketing and learning to measure it? What steps do they need to take?
A: “The first step is to not worry about what they are going to do with Facebook and Twitter and blogs. Put that aside. Businesses don’t need to worry about building a social media strategy. What they need to do is focus on understanding their own business strategy …
This means that businesses should start by outlining specific goals. What do they want to accomplish? Increase sales? Fix a PR problem? … Write them down. Articulate them. Understand them.
Once you have that, you set specific targets: Increase sales? Okay. What does that mean? Agree to a number. Be specific: How much? By what date? Write it down.
Now that you have that, look at social media and start thinking of ways to plug it into your overall plan to achieve these goals and hit those targets.”

Q: How can they calculate ROI on marketing programs?
A: “The two ways to determine the ROI of a marketing program are:
■ Calculate the extent to which using social media has resulted in a cost reduction. A marketing department could look at the relative cost per impression between Facebook and TV advertising, for example. If an organization can reach the same amount of eyeballs at a lower cost, you can show that social media reduces operating costs.
■ Calculate the extent to which using social media has resulted in an increase in revenue. Dell did this quite simply by pushing promotions through Twitter. The computer giant then tracked purchases that resulted from click-throughs from these tweets. For most businesses, connecting an increase in revenue to social media is rarely that simple or direct, but this illustrates the basic principle.”
Q: Is there a difference you think between measuring traditional versus social media?
A: “Yes. The world of social media comes with its own set of metrics, some of which are far more sophisticated than what traditional channels can offer, and at a far lower cost. That said, companies … should be careful to remember to tie media measurement to business measurement … If an organization cannot connect the dots between the 30,000 pairs of eyeballs per day a campaign is attracting and the three net new customers the campaign effectively yielded, it will not realize that something went wrong, and as a result, won’t be able to make necessary course corrections.
I cannot stress enough how crucial it is for businesses and their marketing partners to connect those dots.”
Q: What are the top three mistakes small businesses make on ROI? And how can they be avoided?
A: “First is mistaking non-financial outcomes with ROI, which is financial. For example, mistaking net new Twitter followers for ROI …
Second is expecting that every use of social media within an organization should result in ROI. If a business function is not responsible for demonstrating ROI, its use of social media should not be held to a different standard. Public relations and human resources, for example, are rarely required to demonstrate their contribution to the bottom-line. This should not change because social media is suddenly thrown into the equation…

Third is trying to measure the ROI of a specific channel on a continuous basis when various channels and types of media overlap and complement each other. Say you are managing a marketing campaign that combines print, TV, radio, social media, email and point-of-purchase. With such a mix of media … how in the world can you ever hope to accurately measure the specific impact of social media channels versus other channels?
There is a trick to this: Measure in slivers … Every month, run a special promotion for a specific interval. Say 48 hours. Create awareness for this promotion by creating ads or marketing content across every channel you want to test. Assign a unique discount code for each of these channels.
This means that print discount codes will be different from email discount codes, and different still from Twitter, Facebook and TV discount codes. At the point of purchase, simply collect the discount codes. The data will let you know exactly what percentage of sales were driven by activity on each channel.
Over time, you will be able to determine what percent of your business is influenced by what channels, how this changes over time, etc.
This column was originally published in the Lexington Herald-Leader on Monday, April 25, 2011.